All eyes on the Euro and Aus­tralian GDP

The EURUSD has com­menced the week by record­ing a fresh 2014 low (1.3184) with a com­bi­na­tion of geo-po­lit­i­cal ten­sions in East­ern Europe height­en­ing the pos­si­bil­ity of fur­ther Rus­sian eco­nomic sanc­tions, along­side Fri­day’s news that EU CPI dropped to its low­est level in 5 years (with Italy CPI con­tract­ing) weigh­ing on the EU cur­rency.

The one-week dead­line awarded by EU lead­ers in Brussels on Satur­day for Rus­sia to defuse the emerg­ing con­flict in Ukraine should slow EURUSD weak­ness, so those hop­ing for EURUSD soft­ness will be look­ing for the EU fun­da­men­tals to en­cour­age eco­nomic con­cerns. On Wed­nes­day, a va­ri­ety of EU ser­vices PMIs are an­nounced, along­side EU re­tail sales. On Thurs­day morn­ing, the lat­est Ger­man fac­tory or­ders will come un­der the spot­light be­fore the ECB in­ter­est rate decision and Mario Draghi’s press con­fer­ence on Thurs­day af­ter­noon.

In re­gards to the ECB decision, French Prime Min­is­ter Manuel Valls re­cently called for fur­ther ac­tion from the ECB to de­value the EU cur­rency and the emer­gence of de­fla­tion in Italy has in­creased spec­u­la­tion of fur­ther ECB stim­u­lus. How­ever, those hop­ing for ECB ac­tion this week could be left dis­ap­pointed, as a fall in en­ergy prices along­side an over­sup­ply of oil could have cor­re­lated to­wards in­fla­tion lev­els edg­ing lower in Au­gust. If the ECB un­ex­pect­edly acts this week, a fur­ther in­ter­est rate cut seems most likely. The pos­si­ble in­tro­duc­tion of QE is some­thing that might oc­cur at a later date. The ECB will re­quire con­fir­ma­tion that the EU is star­ing di­rectly at de­fla­tion, rather than en­coun­ter­ing even lower CPI lev­els due to a fall in en­ergy prices.

As usual, Mario Draghi’s press con­fer­ence fol­low­ing the ECB in­ter­est rate decision will be watched closely. The ECB pres­i­dent will more than likely be heav­ily quizzed for his opin­ion re­gard­ing wors­en­ing EU eco­nomic data, along­side a pos­si­ble time­frame for an in­tro­duc­tion to QE. Fol­low­ing calls for an even lower val­ued EU, a dovish speak­ing Draghi may ap­pear on Thurs­day af­ter­noon. If this oc­curs, bear­ish move­ment in the EURUSD will in­crease. The Septem­ber 6, 2013 low can be lo­cated at 1.3104 with fur­ther EURUSD support lev­els found around 1.3083 and 1.3055. The Aussie is another can­di­date for in­creased vo­latil­ity, with the lat­est Re­serve Bank of Aus­tralia (RBA) in­ter­est rate decision, build­ing ap­provals, GDP and a speech from Gov­er­nor Stevens all sched­uled. The RBA is largely ex­pected to keep mon­e­tary pol­icy un­changed. Those look­ing for bear­ish move­ment in the AUDUSD will be hop­ing for a dovish clos­ing mon­e­tary pol­icy state­ment, per­haps reit­er­at­ing that the AUDUSD re­mains over­val­ued.

The build­ing ap­provals re­lease will also be firmly un­der the mi­cro­scope, with the Aus­tralian econ­omy re­main­ing un­der pres­sure to move away from min­ing/ex­ports re­liance and tran­si­tion to­wards do­mes­tic con­sump­tion. Last month, a 1.9% build­ing ap­provals con­trac­tion in­spired AUDUSD sell­ing and a re­peat per­for­mance will raise anx­i­ety for Wed­nes­day’s GDP re­lease.

The Aus­tralian GDP re­lease is the most likely of the data an­nounce­ments to in­spire AUD vo­latil­ity. Since around April, the RBA ex­pressed on sev­eral oc­ca­sions that the Aus­tralian econ­omy is set to en­ter a pe­riod of weaker eco­nomic growth, due to an ex­pected de­cline in its min­ing in­dus­try. Ad­di­tion­ally, Gov­er­nor Stevens has fre­quently sug­gested that in­vestors were un­der­es­ti­mat­ing the risk of a sig­nif­i­cant drop in the AUD cur­rency. If the AUD is set for a de­cline, a weaker than ex­pected GDP re­lease on Wed­nes­day will be re­quired.

In­vestors will be pay­ing very close at­ten­tion to­wards what con­tri­bu­tion the min­ing sec­tor pro­vided to the Aus­tralian GDP in the pre­vi­ous quar­ter, fol­low­ing the Aus­tralian econ­omy re­ceiv­ing crit­i­cism for the sec­tor ac­count­ing for 0.9% of 1.1% Q1 GDP growth. Sim­i­larly, in­vestors will also be pay­ing at­ten­tion to­wards whether the Aus­tralian econ­omy is im­prov­ing do­mes­tic con­sump­tion.

If the GDP re­lease con­firms pre­vi­ous RBA warn­ings that the Aus­tralian econ­omy is set to en­ter weak eco­nomic growth, AUDUSD support lev­els can be found at 0.9323, 0.9306, 0.9285 and 0.9271. Also, if AUD weak­ness is forth­com­ing, there might be an op­por­tu­nity for the AUDNZD to pull­back slightly after ap­pre­ci­at­ing by 200 pips in Au­gust. In which case, po­ten­tial support lev­els can be found at 1.1067, 1.1049 and 1.0955.